Opinion

Anatole Kaletsky

Janet Yellen’s moment

Anatole Kaletsky
Mar 18, 2014 15:37 UTC

When Janet Yellen chairs her first meeting of the Federal Open Market Committee Tuesday and Wednesday, she will be presented with a once-in-a-generation opportunity that even her predecessors in the world’s most powerful economic position have rarely enjoyed.

Not only can Yellen alter the guidance on interest rates with which the FOMC has been steering global financial markets. Beyond that she could do something far more profound and exciting: transform an entire generation’s way of thinking about economics, market forces and the role of government in achieving and maintaining prosperity.

To start with the obvious, Yellen will almost certainly change or simply abolish the unemployment “threshold” of 6.5 percent announced early last year as a reference point for the FOMC to start considering the possibility of higher interest rates — perhaps setting a threshold of 5 percent or so. More radically, she could supplement the objective of lower unemployment with a range of other indicators that will need to improve before the Federal Reserve even considers any monetary tightening: for example, accelerating gross domestic product growth; strengthening productivity trends and eliminating the excess capacity in many industries that is now discouraging investment, hiring and productivity growth, as well as holding down corporate pricing power.

This potential broadening of the range of monetary objectives suggests the really radical possibilities opened up by Yellen’s leadership of the Fed. Might she announce, for example, that as the economy recovers, the Fed will ignore accelerating inflation and focus entirely on promoting maximum employment, unless and until inflation exceeds some truly uncomfortable level such as 3 or 4 percent? Will she follow up on some of the work done within the Fed, suggesting that expansionary monetary policy can act not just as a cyclical stimulus, but could also improve supply-side conditions and long-term productivity growth?

Might she even suggest that, if the economy requires further monetary stimulus in future, Quantitative Easing could be coordinated with fiscal policy? For example, the Fed could print “helicopter money” for the government to “drop” directly on to the public via citizen dividends or per capita tax rebates.

Japan as the crisis next time

Anatole Kaletsky
Mar 14, 2014 15:16 UTC

Which major economy is most likely to disappoint expectations this year, and perhaps even cause a financial crisis big enough to break the momentum of global economic recovery? The usual suspects are China and southern Europe. But in my view the most likely culprit will be Japan.

While Japan no longer attracts much attention these days, it is still the world’s third-largest economy, with a gross domestic product equal to France, Italy, Spain, and Portugal combined. Its industries still pose the main competitive challenge to U.S., European and Korean manufacturers, and its regional weight is still sufficient to trigger financial crises across the whole of Asia — as it did in 1997.

To make matters worse, the Japanese government bond market is in an enormous financial bubble that could burst catastrophically if Prime Minister Shinzo Abe’s audacious economic program is seen to have failed.

Markets already see a Putin win

Anatole Kaletsky
Mar 6, 2014 21:24 UTC

Oscar Wilde described marriage as the triumph of hope over experience. In finance and geopolitics, by contrast, experience must always prevail over hope, and realism over wishful thinking.

A grim case in point is the confrontation between Russia and the West in Ukraine. What makes this conflict so dangerous is that U.S. and EU policy seems to be motivated entirely by hope and wishful thinking. Hope that Russian President Vladimir Putin will “see sense” — or at least be deterred by the threat of sanctions to Russia’s economic interests and the personal wealth of his oligarch friends. Wishful thinking about “democracy and freedom” inevitably overcoming dictatorship and military bullying.

Investors and businesses cannot afford to be so sentimental. Though we should never forget Nathan Rothschild’s advice at the battle of Waterloo — “buy on the sound of gunfire” — the market response to this week’s events in Ukraine makes sense only if we believe that Russia has won.

The case against a Chinese financial crisis

Anatole Kaletsky
Feb 24, 2014 17:13 UTC

A severe slowdown in China is viewed as among the greatest risks facing the world economy this year, and Thursday’s dismal news on Chinese manufacturing output exacerbated these fears. But the really important news from Beijing pointed in the opposite direction: Bank lending in China, instead of slowing dramatically as many economists had expected, accelerated in January to its fastest growth in four years.

This means China is unlikely to act as a brake on the global economy in the months ahead — despite the recent weak manufacturing figures. It also suggests that predictions of a credit crunch or financial crisis in China will likely prove wrong — or at least premature.

To welcome stronger bank lending in China is not to deny that credit growing at double the gross domestic product growth is unsustainable and will ultimately have to be curbed. The Chinese authorities themselves clearly believe this. The government and the central bank want to reduce credit growth and to replace the unregulated, opaque “shadow lending” system with properly supervised, well-capitalized modern banks.

Yellen looks toward a Keynesian approach

Anatole Kaletsky
Feb 13, 2014 19:18 UTC

This has been a banner week for the world economy, inspired largely by events in the United States.

In Washington, the first congressional testimony from Janet Yellen in her position as new Federal Reserve Board chairwoman reassured and impressed two notoriously petulant audiences: Tea Party congressmen, who had assembled a posse of hostile witnesses to attack the Fed’s “easy money” policies; and panicky Wall Street investors, who had spent the previous month swooning on fears that monetary policies might not be easy enough.

The significance of Yellen’s testimony lay not in the fact that she was a bit more “dovish” than former Chairman Ben Bernanke, or seemed more committed to the new central bankers’ fad for “forward guidance,” as opposed to “quantitative easing.” More striking, if subtle, was the change in economic philosophy that Yellen represented.

Behind the wave of market anxiety

Anatole Kaletsky
Feb 6, 2014 23:33 UTC

What has caused the sudden anxiety attack that overwhelmed financial markets after the New Year? We may find out the answer at 8.30 on Friday morning, Eastern Standard Time.

Almost all agree that the market turmoil has been linked to alarming events in several emerging economies — including Turkey, Thailand, Argentina and Ukraine — that has spilled over into concerns about more important economies, such as China, Russia, South Africa, Indonesia and Brazil.

But why has near-panic hit so many emerging markets at the same time?

There seem to be four broad explanations. Whether this current volatility marks the end of the straight-line ascent in asset prices that started in March 2009, or whether it is just another opportunity to “buy on dips,” will largely depend on the relative importance of each of these factors.

A central banker’s ‘license to lie’

Anatole Kaletsky
Jan 30, 2014 21:43 UTC

Federal Reserve Chairman Ben Bernanke, who retires this week as the world’s most powerful central banker, cannot be trusted.

Neither can Janet Yellen, who will succeed him this weekend at the Federal Reserve.

And neither can Mark Carney, governor of the Bank of England; Mario Draghi, president of the European Central Bank, or any of their counterparts at the central banks of Turkey, Argentina, Ukraine and so on.

Venice’s renaissance shows a path for European revival

Anatole Kaletsky
Jan 23, 2014 15:45 UTC

“I have seen the future and it works,” said Lincoln Steffens, a left-wing American journalist, on returning from the Soviet Union in 1919. After a weekend in Venice at a seminar organized by the Italian ambassador to Britain, I found myself struck by the same thought, which is not exactly the reflection that the world’s most perfectly preserved medieval city is supposed to inspire. Venice is a clichéd metaphor for “Old Europe” — a sclerotic old continent fixated on its past and now retiring to become a museum society, destined gradually to sink beneath the sea. But should we perhaps be inspired, not depressed, by the thought of Venice, the ultimate “museum city,” as a microcosm of Italy and even of Europe as a whole? After all, Venice is still standing, not sinking into the sea, and after 500 years of supposed decline it is still stunningly beautiful. Maybe Italy and Europe, instead of sinking, will also prove their resilience and make a comeback?

An event this week that pointed to this conclusion was the deal on electoral reform announced by Italy’s two biggest political parties: Matteo Renzi’s governing socialists and the opposition led by Silvio Berlusconi. This pact, which should create stronger majority governments, was significant — not just for Italy but for all of Europe, because quite modest policy reforms would be sufficient to revive the Italian economy and transform economic policy debate across Europe. For example, a broad consensus now exists for moderate labor reforms, for big reductions in the employment tax burden, for dismantling overlapping layers of government bureaucracy and for shifting welfare spending from over-generous pensions to education, training and active measures to help the unemployed. But none of these “supply-side” reforms would achieve useful results unless supported by a stimulus from monetary and fiscal policy.

The European Central Bank understands this, and even the German government’s resistance to economic stimulus is eroding. So if a stable and democratically credible Italian government showed willingness to seriously implement supply side programs, the ECB would surely respond with strong measures to expand credit, especially small business loans. And given the importance of small businesses to Italy, an aggressive program of officially-backed SME lending could have a similar electrifying effect on the Italian economy as it did last year in Britain, with government-guaranteed mortgage loans. In turn, a rebound of economic activity in Italy would have big effects on business and financial confidence in Spain, Greece, Portugal and France, as well as quite possibly transforming the German economic policy debate.

Will Britain really leave the European Union?

Anatole Kaletsky
Jan 16, 2014 16:00 UTC

Is it conceivable that Britain will leave the European Union? A few years ago this question would hardly have been worth asking.  In the past 12 months, however, the issue of EU withdrawal has shot into the British political headlines.

The latest, and apparently most authoritative, such headlines appeared this week, after a pugnacious speech by George Osborne, the Chancellor of the Exchequer and second most powerful figure in the British government. Reuters headlined the Chancellor’s comments like this: “Reform or lose us as a member, Osborne tells the EU.” The Daily Telegraph highlighted the same message: “Osborne warns Britain may leave EU over reform failure.” The BBC headline concurred: “Osborne – Don’t force UK choice between euro and EU exit.”

While the idea of a British EU exit has now become so mainstream that “Brexit” is a universally recognized acronym among diplomats and financiers, no British politician of Osborne’s seniority has previously threatened so explicitly to pull out. But does this really mean that Brexit is becoming more likely?

Five predictions for financial markets in 2014

Anatole Kaletsky
Jan 2, 2014 14:34 UTC

Happy New Year! For the first time since 2008, we investors, economists and businesspeople say these words without irony. While last year was statistically disappointing, with global growth slowing slightly from 2012 and apparently belying the optimism expressed here last January, the verdict of financial markets and business sentiment has been much more consistent with my predictions. Despite the apparent slowdown, stock markets enjoyed their best performance since the 1990s, long-term interest rates soared and consumer confidence all over the world ended 2013 much higher than it started. This apparent paradox is easily explained: the statistical weakness of 2013 was due entirely to a very weak period last winter, connected with the U.S. presidential election and leadership transition in China. By the second quarter, growth had revived in the U.S. and China and accelerated strongly in Britain and Japan.

That conventional wisdom last January was far too pessimistic about the economic outlook is evidenced by the subsequent behavior of financial markets, where equities outperformed bonds by the biggest annual margin on record. But today almost everyone is optimistic. So what unexpected developments could surprise financial markets and business sentiment in 2014? Below are five personal guesses — some possibly far-fetched and others are seemingly obvious, but none yet fully reflected in market prices:

1. Four is the new two.

I think the U.S. economy will grow by about 4 percent, much faster than the 2.5 to 3 percent predicted by the IMF and mainstream economic forecasts. My reasoning is simple. In the last reported quarter, the U.S. economy was already growing by 4.1 percent and the private sector by 4.9 percent. With U.S. budget battles now over and short-term interest rates firmly anchored at zero, there is no reason to expect a slowdown. If the U.S. accelerates to around 4 percent, so will global growth and 4 percent will replace 2 percent as the growth rate assumed in business and financial planning. Global inflation expectations will also rise to around 3 percent, raising the benchmark for global growth in nominal terms to around 7 percent, very similar to the 10 years before the 2008 financial crisis. In other words, the “new normal” of global stagnation widely predicted after the crisis will turn out to be not very different from the old normal.

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